Your pricing should be influenced by your customer’s reference point

We love to think of ourselves as rational, objective beings. And yet endless scientific studies indicate that we are anything but… context, the framing of information, and cues can have a profound influence upon how we view the world, and the decisions that we make..

Let’s start with a fun warm-up exercise!Real quick – what animal is displayed in the picture to the right?(make a mental note of what you think and then scroll down for the answer)The answer is… drum roll please… there are two answers in fact. The picture is most certainly of a rabbit. But the picture is also of a duck. Can you see both of them? (I’ll wait if you want to scroll back up and have another look…)

For the majority of you who are seeing this optical illusion for the first time, I would guess that you saw a rabbit when you looked at the picture. Why? Thumper. The picture of Bambi’s pal sitting at the top of this post alongside a carrot acted as a “cue”, priming the “rabbit neurons” in your brain, and shaping your perception in the process. (Had I shown you a picture of Daffy Duck instead of Thumper, many of you would have seen a duck, not a rabbit. Sorry, Daffy.)

But what do “rabbit-ducks” have to do with marketing & pricing?
Simple. To be a successful marketer, it is critical that you develop an adeptness for identifying consumer contexts & reference points, as these factors strongly influence consumer perception, behavior, and price sensitivity. Of course, identification alone is not enough – you must use such insights as key inputs into your overall marketing strategy.

So to use a silly, “Thumpereqsue” example, if you know that people are bringing a “bunny-loving” lens to your restaurant because Bambi is playing at the movie theater next door, you might not want to offer wild rabbit as one of your dinner specials.

“Doug, can I interest you in tush warmers?”
Let’s bring the concept of consumer context & reference points a little closer to home with an example that many of us can relate to: the old “car-options” strategy utilized successfully by thousands of car salespeople every day… it goes like this: if you’re purchasing a big-ticket item (e.g., a new car, an expensive vacation, a new suit, etc.), you’re more likely to also purchase lower-priced “options” or ‘add-ons’ than if you were offered these same items at a later date.
(hypothetical scene of me in a showroom purchasing a new car)“Doug, how about we add those tush warmers to the car?… only $250 per seat… you know how chilly leather seats can get in New York during the winter…”

Now instead imagine Mr. Salesperson offering me the same “warmers” for my new car 2 weeks after I’ve driven it off the lot. Even if he could have them installed without my having to lift a finger, I would likely balk at the offer.

“Thanks for the offer, Mr. Salesperson, but I think I’m all set. Love the new car, by the way. Thanks again for all your help”

Same tush warmers. Different context, different reference points, and different willingness to make a purchase.

In the first scenario I was in “open-wallet” mode. In the second scenario I was not. In the first scenario my reference point for the tush warmers was the several thousand dollar new car that I was in the process of buying. In the second scenario my reference point might have been an outrageous electric bill that I had paid only moments before the salesman made his offer.

Jelly belly’s popcorn-flavored channel & pricing strategyJelly belly, a leader in the jellybean industry, provides us with a good example of a company that leveraged its knowledge of consumer reference points to develop a channel strategy that enabled it to charge premium prices for its jellybeans.
Instead of selling its jellybeans through traditional candy outlets, Jelly Belly made the conscious decision to sell them at specialty and gift stores, where sweets alternatives included higher-priced items such as gourmet chocolates and fruit baskets.

Since the reference points of people shopping at gift stores were these higher-priced sweets and not other jellybeans, Jelly Belly could price its ‘beans at a substantial premium to other ‘beans and still provide a cheaper sweets alternative for the gift-store shoppers.

Same jellybeans. Different context, different reference points, different price sensitivity.

How do I start applying these concepts?
Leveraging your insights around consumer context & reference points can turbo-charge the performance of your business by providing you with the means to significantly improve your marketing & pricing strategy.

The first step in this powerful process is to generate deep insights around your target customer’s context & reference points. Below I have supplied some initial questions to get you started:insights around customer context
What are the most common contexts in which your target customers [develop a need for | search for & learn about | compare & purchase | install | use & maintain | repurchase] your product or service?

-What do I mean by “context”? Context refers to those attributes that describe the environments of your target customers, such as: where they are – time & place. who they are they with. what they are doing. what is on their minds. their current objectives & goals. their current physiological & emotional states. get the idea?

insights around reference points
What reference points are your consumers using when they [search for & learn about | compare & purchase | use & maintain | repurchase] your service? How do these reference points impact: Their receptivity to your offering? Their openness to the price of your offering? Their experience when using your offering?

-What do I mean by “reference points”? Reference points are the points of comparison or anchors a consumer uses when assessing or experiencing your product. To use an extreme illustration, imagine two people who are given a used 2005 Toyota Corolla for free. One is a first-generation immigrant who earns $17,ooo a year, whose only mode of transport is a beat-up Yamaha motorbike. The other is a multi-millionaire who already owns 4 luxury cars. Given the two people’s vastly different reference points for the free Toyota, their responses to the news about the free car will differ dramatically. After generating insights around your target customers’ contexts & reference points, you will want to explore how you can use these insights across critical aspects of your marketing strategy. In some cases how to leverage the insights will be obvious; in other cases you will have to stretch your thinking and percolate your creative juices.

In a future post I will run through some concrete examples so you can see these essential marketing concepts in action, and develop a greater understanding for how to use them in your business.

As always, I welcome your comments, thoughts, and questions.

Please feel free to email me if you have any questions about pricing and how to effectively use reference points within your business.